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Buffett Indicator: UK Stock Market Valuations and Expected Future Returns

Updated at Mon, 20 Sep 2021 20:30:06 -0500
Country: UK (updated daily) check out Global Overview for detailed methodology.

According to the original Buffet Indicator, the Stock Market is Fair valued.

Ratio of total market cap over GDP: Recent 20 Year Maximum - 139.05%; Recent 20 Year Minimum - 46.42%; current - 106.29%
Expected future annual return: 5.1%

Based on the newly introduced total market cap over GDP plus Total Assets of Central Bank ratio, the Stock Market is Modestly Undervalued.

Ratio of total market cap over GDP plus Total Assets of Central Bank: Recent 20 Year Maximum - 134.74%; Recent 20 Year Minimum - 39.51%; current - 71.74%
Modified expected future annual return: 8.2%

ETF Used for dividend yield: EWU (Yield=2.71%)
Market Index used: FTSE 100 index
Current Annual GDP: $2,812 billion US dollars or 2,059 in billions of national currency (GDP in Local Current Prices Annual Growth=2.1%)
Current Total Asset of Central Bank: $1,355 billion US dollars or 992 in billions of national currency
Data since year 1984


UK Historical GDP Growth

Historical GDP of UK in billions of national currency. The GDP in local current prices has grown at the annual rate of 2.1% over the past 8 years. Please note this growth rate includes the effect of price inflation and it is NOT the real GDP growth rate. Current Annual GDP: $2,812 billion US dollars or 2,059 in billions of national currency.

UK GDP (Billion, National Currency)

Historical Stock Market Cap

Historical total market of UK in billions of national currency. This value is normalized using the data published by WorldBank. FTSE 100 index is used for the normalization. Represents about 80% of total market index in UK, back to 1982. Use total market cap number of 1.8 trillion pounds as of June 30, 2011 to normalize FTSE All share index to total market cap.

UK Total Market Cap (Billion, National Currency)

Historical Total Assets of Central Bank

Historical Total Assets of Central Bank of UK in billions of national currency, which is obtained from each country’s central bank balance sheet. Please be aware that if the total assets is displayed as zero or - , it suggests that there's no data available rather than the original data being zero. In this case, the modified version of both the ratio and projected annualized market return will be treated the same as the original version.

UK Total Assets of Central Bank (Billion, National Currency)

Original and Modified Historical Ratio of Total Market Cap over GDP (%)

The current ratio of total market cap over GDP for UK is 106.29%. The recent 20 year high was 139.05%; the recent 20 low was 46.42%. If we assume that the ratio will reverse to the recent 20 years mean of 108.83% over the next 8 years, the contribution to expected annual return is 0.3%.

Based on the modified version, the current TMC / (GDP + Total Assets of Central Bank) Ratio for UK is 71.74%. The recent 20 year high was 134.74%; the recent 20 low was 39.51%. If we assume that the ratio will reverse to the recent 20 years mean of 94.03% over the next 8 years, the contribution to expected annual return is 3.44%.

This is the detailed historical chart of the original TMC / GDP ratio and modified TMC / (GDP + Total Assets of Central Bank) ratio.

UK Original and Modified Ratio of TMC over GDP (%)

Based on these historical valuations, we have divided market valuation into five zones:

Ratio = Total Market Cap / GDP Valuation
Ratio ≤ 76% Significantly Undervalued
76% < Ratio ≤ 98% Modestly Undervalued
98% < Ratio ≤ 120% Fair Valued
120% < Ratio ≤ 141% Modestly Overvalued
Ratio > 141% Significantly Overvalued
Where are we today (2021-09-21)? Ratio = 106.29%, Fair valued

Based on these modified historical valuations, we have divided market valuation into five zones:

Ratio = Total Market Cap / (GDP + Total Assets of Central Bank) Valuation
Ratio ≤ 66% Significantly Undervalued
66% < Ratio ≤ 85% Modestly Undervalued
85% < Ratio ≤ 103% Fair Valued
103% < Ratio ≤ 122% Modestly Overvalued
Ratio > 122% Significantly Overvalued
Where are we today (2021-09-21)? Ratio = 71.74%, Modestly Undervalued

Predicted and Actual Returns

From the equation presented on the U.S. market valuation page,

Investment Return (%) = Dividend Yield (%) + Business Growth (%) + (Re/Rb)(1/T)-1

We can compute the predicted and actual returns of the UK stock market over a given time period, T. In the calculation, we set T to equal eight years, the approximate length of a full economic cycle. The calculated results are presented in the chart below.

The Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / GDP ratio reverts to its recent 20 years mean of 108.83%.

The Modified Predicted Return line indicates the expected, or predicted annualized return for the next eight years if the current TMC / (GDP + Total Assets of Central Bank) ratio reverts to its recent 20 years mean of 94.03%.

The Actual Return line indicates the actual, annualized return of the UK stock market over eight years. We use “FTSE 100 index” to do the actual return calculation. We can see the calculations largely predicted the trend in the stock market as the actual return line is closely parallel to the two predicted return lines.

Predicted and Actual Returns of UK

Conclusion

Under the original buffett indicator, the stock market of UK is expected to return 5.1% a year for the coming years. This is from the contribution of economic growth in local current prices: 2.1%, Dividend Yield: 2.71% and valuation reverse to the mean 0.3%.

Under the modified model, the contribution of economic growth and dividend yield stays the same while the valuation reverse to mean changes to 3.44%. Consequently, the stock market of UK is expected to return 8.2% a year.

This is the projected return and the modified projected return of the stock market in UK relative to other countries. Click on the country on the left sidebar to check out the details for each country.





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